Friday, November 4, 2011

Bank Transfer Day Shows that the Time Has Come to End CU Tax Exemption

Credit unions have embraced Bank Transfer Day with gusto advocating that consumers should move their accounts from banks to credit unions.

According to a survey of 5,000 credit unions by the Credit Union National Association, approximately 650,000 customers have joined a credit union, since September 29.

This just illustrates the point that many tax-exempt credit unions have evolved into direct competitors with taxpaying banks and should have their preferential tax treatment revoked.

The principle of tax equity states equals should be treated the same by the tax code. Therefore, institutions that are engaged in the same lines of business and are in competition with one another for the same customers should be subject to the same tax treatment.

For example, Congress in 1951 repealed the tax exemption for cooperative banks and mutual savings associations because it found that these institutions were in active competition with taxable institutions and continuing their tax exemption would be discriminatory.

Additionally, the President's Economic Recovery Advisory Board (PERAB) last year came to the same determination when it set forth as a policy option the repeal of the credit union tax exemption. PERAB wrote:

"Unlike other financial institutions like banks and thrifts, credit unions do not pay corporate taxes on their income. This puts them at a competitive advantage relative to other financial institutions for tax reasons. Eliminating this exemption would raise revenue and level the playing field, but would clearly raise taxes on credit unions."

So, the potential legacy of Bank Transfer Day may be the demise of the credit union tax exemption.

9 comments:

On the next Bank Transfer Day, Bankers will be asked to move their charter to NCUA.

They won't, because the tax system is rigged, with banks (not credit unions) as the greatest beneficiaries of tax subsidies and benefits.

Take Wells Fargo. Taxpayer bailout of $25 billion. If the bank were assessed at the usual 35 percent corporate income tax rate, it would have paid the IRS nearly $18 billion during the crisis it helped cause. The bank paid no taxes.

Goldman Sachs got a $10 billion from taxpayers. The bank paid no income taxes in 2008, the same year of the TARP infusion. Over the three-year crisis period Goldman reported $4.9 billion in profits.

PNC Financial Services Group grabbed $7.6 billion from the government. But PNC’s three-year profit was just under $8 billion yet it paid no income tax in 2009 and 2010.

State Street Corp. received $2 billion from taxpayers. The company’s three-year profit was $731 million. It paid no income tax in 2010.

Capital One Financial Corp received a $3.6 billion from taxpayers. The company’s three-year profit was $1.3 billion. It paid no income tax in 2010.

The list goes on.

Your academic citations should include Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

Banks created their own problems. Don't blame credit unions. Credit unions will still be a blip on the radar screen in terms of market share when this is all said and done. If you're that worried about the threat of credit unions and need to continue to use the tax exemption as your argument start thinking about what banks good do better in serving their customers instead of putting your shareholders first.

Credit unions will not fall for the bankers - full taxation with limited powers (that happened in the 1950s). Full taxation will equal FULL powers. Then you will see credit unions eat the banks for lunch!!!!

Credit Unions may be not for profit tax exempt institutions. But with the NCUA corporate stabilization assessment(s) it sure makes our tax exempt status expensive to support. Credit Unions should pick up the bank charter as indicated above and dodge taxes just like the banks. This will bring us to a level playing field.

Yawn - ABA's argument is deeply flawed and is passe. If a group of business owners choose not to enrich themselves (at the expense of the their customers and other subordinate owners)in favor of keeping more capital in the hands of its members/owners/customers (who in turn ARE taxed) then so be it. ABA is like a dog at the food bowl having stuffed themselves silly but having a fit if anyone else dare wants to eat. If tax exemption is so great and competitively biased, then convince your board to volunteer their services, your executive team to take dramatic paycuts, and apply for a credit union charter.

Not only do they have an unfair advantage in regard to taxation, they have not had the same captital requirements as banks and they are not regulated the same as banks. In our town, they are taking deals that most community banks would run from. Their day is comming soon! It will help restore the confidence in the banking industry.....

You are right as credit unions have tougher capital requirements than banks. While CUs don't have CRA (as credit unions were not found to redline like the banks in the 70s), credit unions have loan term limits and interest rate limits that would cripple banks. Remember that federal credit unions have an 18% interest rate cap. Would your bank want that?

Would your board members like the liability for the institution without pay or special loan arrangements that are not possible at credit unions? Public officials can be on the boards of banks but are mostly prohibited from serving on credit union boards.

If the grass is so much greener, come on over. The weather is great!!!

About Me

Dr. Keith Leggett is retired from the American Bankers Association, where he was a Senior Vice President & Senior Economist. He is a leading expert on credit unions and the National Credit Union Administration.

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